MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) Overview
Puradyn, which has been in business for over 25 years, and designs,
manufactures, and sells the Puradyn® System, a high-efficiency bypass oil
filtration system and replacement filter elements. We generate revenues through
the initial sale of the bypass oil filtration systems and through the sale of
the replacement filter elements. We purchase component parts for unit housing
and filter elements and the component parts are assembled, packed and shipped
from our facility in Boynton Beach, Florida.
Sales of the Company's products depend principally upon acceptance and demand by
end-user customers and OEMs. We focus our sales strategy on the development of
OEM and individual end user relationships, along with building distributor sales
efforts to continue expansion of a nationwide distribution network that will not
only sell but also install and support our product. We currently have
approximately 100 active distributors in the U.S. and internationally.
We also focus our sales and marketing efforts to target industries open to
innovative methods to reduce oil maintenance operating costs and overhaul
cycles. These industries are also searching for new and progressive technologies
to optimize their equipment use, including bypass oil filtration. While this is
a long-term and ongoing process, we believe we have achieved a degree of product
acceptance based on the expansion of existing strategic relationships we have
with Nabors Industries, Inc. and other end-users and distributors, including:
On April 9, 2014, management announced the receipt of an initial order from one
of its distributors for Puradyn Systems for a military contract planned for 750
generator sets to be built by a major military contractor utilizing John Deere
engines starting in October of 2014 and concluding in September of 2017.
Following receipt of this initial order, we expect to receive future orders
through our distributor to supply Puradyn systems for this military contract in
accordance with military build requirement over this period. Puradyn is a second
tier supplier to this military contractor and as such does not have a separate
contract with the military for this order. If the military carries out its
contract in full, it is estimated to generate around $300,000 in revenue over
the three years. Sales for first six months of 2014 were approximately $9,600.
Our net sales for the second quarter of 2014 increased 29% from the comparable
period in 2013. This increase is attributable to sustained increased activity
from a number of our larger accounts at the beginning of the third quarter of
2013. We believe that industry acceptance will grow in fiscal 2014 based in part
upon our progress this year. However, there can be no assurance that any of our
sales efforts or strategic relationships will meet management's expectations or
result in an increase in our revenues.
The Company's financial statements have been prepared on the basis that it will
operate as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses each year since inception and has relied on the sale of its
stock from time to time and loans from third parties and from related parties to
fund its operations.
These recurring operating losses, liabilities exceeding assets and the reliance
on cash inflows from a current stockholder have led the Company's management to
conclude there is substantial doubt about the Company's ability to continue as a
--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. We believe
the critical accounting policies in Note 1 to the financial statements appearing
elsewhere in this report affect our more significant judgments and estimates
used in the preparation of our financial statements. Actual results may differ
from these estimates under different assumptions and conditions.
Results of Operations for the Three-months Ended June 30, 2014 Compared to the
Three-months Ended June 30, 2013
Net sales increased 29% in the second quarter of 2014 as compared to the second
quarter of 2013. The increase in sales was primarily due to two customers who
increased purchases accounted for 69% of the increase in sales. In addition a
couple of our new distributors are beginning to generate sales in their areas,
and helped to contribute to the increase in the second quarter.
We are dependent upon sales to a limited number of customers. Sales to three
customers accounted for approximately 16%, 12%, and 10%, respectively, for a
total of 38% of the net sales for the three-months ended June 30, 2014, or 65%
of the increase over net sales in the same period in 2013. While we remain
dependent upon sales to a limited number of customers, our sales dependence is
now on a larger group of customers. Sales to three customers accounted for
approximately 20%, 19%, and 15%, respectively (for a total of 54%), of the net
sales for the three-months ended June 30, 2013.
Cost of Products Sold
Gross profit, as a percentage of sales, increased from 16% in the second quarter
of 2013 to 36% in the second quarter of 2014. The increase in gross profit was
also attributable to sales of higher margin products, sales to customers in
higher margin price categories and reduced charges for slow moving inventory.
The last area that contributed to the increase in gross profit resulted from
better pricing in the cost of a few of our key components, purchased during the
period. We have obtained alternative sources for some of these components and
this has contributed to improved margins.
Salaries and Wages
Salaries and wages were decreased by 6% for the quarter ended June 30, 2014
compared to June 30, 2013 as a result of reduced expenses for employee benefits,
primarily stock option expense.
--------------------------------------------------------------------------------Selling and Administrative Expenses
Selling and administrative expenses decreased by 15% for the three months ended
June 30, 2014 from the comparable period in 2013. This decrease was due to a
decrease in travel, marketing expense and professional fees to outside
consultants. As we extend our reach to international customers and develop more
specialized products for niche industries, we anticipate that travel and
marketing costs will increase, but all other expenses will remain stable for the
balance of the year. The following table lists the major categories of expenses
included in Selling and Administrative expenses:
Three Months Ended June 30,
2014 2013 Change
Employee Benefits $ 43,655 $ 54,390 $ (10,735 )
Travel & Marketing 50,515 56,305 (5,790 )
Depreciation & Amortization 5,892 5,805 87
Engineering 191 13,431 (13,240 )
Professional Fees 38,510 50,861 (12,351 )
Investor Relations 302 1,841 (1,539 )
Occupancy Expense 24,757 27,920 (3,162 )
Patent Expense 22,772 21,206 1,566
Stock Compensation 1,139 1,260 (120 )
Bad Debts (32 ) 174 (206 )
Other Expenses 24,568 17,291 7,275
Total $ 212,269 $ 250,484 $ (38,215 )
Interest expense increased 16% for the three months ending June 30, 2014 as
compared to the three months ending June 30, 2013 and was incurred primarily on
the outstanding balance of the stockholder notes payable. The increase was due
to higher borrowings. The Company pays interest monthly on the notes payable to
the stockholder at the LIBOR Daily Floating Rate plus 1.4%, which was a weighted
average of 2.66% as of June 30, 2014 as compared to 2.24% as of June 30, 2013.
Results of Operations for the Six-months Ended June 30, 2014 Compared to the
Six-months Ended June 30, 2013
Net sales increased 42 % in the six months ending June 30, 2014 compared to the
six months ending June 30, 2013. The majority of our sales increase in the 2014
period resulted from orders from two customers in the amount of approximately
$197,000, or 17%.
Sales to two customers individually accounted for 18% and 14% (for a total of
32%) for the six months ending June 30, 2014. Sales to two customers
individually accounted for 16%, and 12% (for a total of 28%) for the six months
ending June 30, 2013.
Cost of Products Sold
Gross profit, as a percentage of sales, increased from 23% in the six months
ending June 30, 2013 to 38% in the six months ending June 30, 2014. The decrease
in cost of goods sold, which generates a higher gross profit, is primarily
attributable to the reserve for slow moving inventory of $42,702 recorded during
the six months ended June 30, 2013 and decreased allocation of manufacturing
overhead due to lower than expected sales.
Salaries and Wages
Salaries and wages decreased by 3% for the six months ending June 30, 2014
compared to the six months ending June 30, 2013. This decrease was primarily due
to decreased expenses associated with employee benefits. Salaries and wages, as
a percentage of sales are 47% for the six months ending June 30, 2013 and 32%
for the six months ending June 30, 2014.
Selling and Administrative Expenses
Selling and administrative expenses decreased 11% for the six months ending June
30, 2014 compared to the six months ending June 30, 2013. The following table
represents the major components of Selling and Administrative expenses for the
six months ended June 30, 2014 and 2013, and the change of those components over
their respective periods:
Six Months Ended June 30,
2014 2013 Change
Employee Benefits $ 98,426 $ 112,739 $ (14,313 )
Travel & Marketing 111,912 120,332 (8,420 )
Depreciation & Amortization 11,143 11,267 (124 )
Engineering (1,673 ) 17,496 (19,169 )
Professional Fees 87,004 106,821 (19,817 )
Investor Relations 908 2,594 (1,686 )
Occupancy Expense 49,220 54,378 (5,158 )
Patent Expense 46,810 43,593 3,217
Stock Compensation 2,132 2,424 (292 )
Bad Debts 1,026 391 635
Other Expenses 43,293 36,149 7,144
Total $ 450,201 $ 508,184 $ (57,983 )
The changes in most components of selling and administrative expenses for the
six months ended June 30, 2014 from the comparable period in 2013 are the result
of the same factors which impacted period to period changes described earlier in
Our investor relations expense increased as a result of the cancellation of our
contract with Emerging Markets. We anticipate that our expenses for investor
relations will remain at or below 2013 levels for the remainder of the current
In May 2011 we entered into an agreement with Monarch Communications, Inc., to
pay a portion of our public relations firm fees in stock. This agreement was
renewed in May of 2012 and 2013. This amount has been reported as a marketing
expense. Amounts reported as stock compensation for 2014 and 2013 represent the
value of options issued to Directors pursuant to our 2000 Non-Employee Directors
Stock Option Plan.
We anticipate expenses for the remainder of 2014 should be similar to those
incurred in the six months ending June 30, 2013.
Interest expense increased for the six months ending June 30, 2014 as compared
to the six months ending June 30, 2013 and was incurred primarily on the
outstanding balance of the stockholder notes payable. The increase was due to
--------------------------------------------------------------------------------Liquidity and Capital Resources
As of June 30, 2014, the Company had cash of $99,077, as compared to $161,503 at
December 31, 2013. At June 30, 2014, we had negative working capital of
($639,149) and our current ratio (current assets to current liabilities) was
0.65 to 1. At December 31, 2013 we had negative working capital of ($769,907)
and our current ratio was 0.57 to 1. The decrease in working capital deficit and
increase in current ratio is primarily attributable to decrease in cash and
inventories, offset by an increase in accounts receivable and prepaid expenses.
We have incurred net losses each year since inception and at June 30, 2014 we
had an accumulated deficit of $57,756,621. Our net sales are not sufficient to
fund our operating expenses. Historically, we have relied on the sale of our
stock from time to time and loans from related parties to fund our operations.
During the six months ended June 30, 2014 we raised an additional $550,100 from
stockholder loans. During the six months ended June 30, 2013, we raised $665,155
from stockholder loans. As of June 30, 2014, we owe our principal stockholder
who is also an executive officer and director of the Company $10.4 million for
funds he has advanced to us from time to time for working capital, which
includes an additional $550,100 advanced during the six months ended June 30,
2014. Interest expense on our loans was $119,982 for the six months ended June
We do not currently have any commitments for capital expenditures. Our current
cash position is insufficient to cover our current operating needs for the next
twelve months, and we do not have any external sources of working capital. While
we anticipate an increase in cash flows from 2014 sales activity, we expect
additional cash will still be needed to support operations, meet our working
capital needs, and satisfy our obligations as they become due this year.
Although we are actively seeking additional equity investments, we have no firm
commitments from any third parties and there are no assurances we will be
successful in attracting additional capital. In addition, as set forth above, we
owe our stockholder $10.4 million which is due on December 31, 2015 or (i) at
such time as we have raised an additional $7 million over the $3.5 million
raised in prior offerings, or (ii) at such time as we are operating within
sufficient cash flow parameters to sustain operations, or (iii) until a
disposition of our company, such as an acquisition or merger, occurs. We do not
have sufficient funds to pay this loan when it becomes due and there are no
assurances our stockholder will extend the due date.
We continue to address liquidity concerns because of inadequate revenue growth.
As a result, cash flow from operations is insufficient to cover our liquidity
needs for the next twelve months of operations. We have implemented measures to
preserve our ability to operate, including organizational changes, a reduction
and/or deferral of salaries, reduction in personnel and renegotiating creditor
and collection arrangements. If budgeted sales levels are not achieved and/or
significant unanticipated expenditures occur, or if we are not able to raise
additional investment capital, we may have to modify our business plan, reduce
or discontinue some of our operations or seek a buyer for part of our assets to
continue as a going concern through 2014. There can be no assurance that we will
be able to raise additional capital or that sales will increase to the level
required to generate profitable operations to provide positive cash flow from
operations. In that event, it is possible that stockholders could lose their
entire investment in our company.
For the six-month period ended June 30, 2014 net cash used in operating
activities was $572,133, which primarily resulted from the net loss of $469,603.
In addition to the cash used in funding the operating loss, the utilization of
cash in operations is also attributable to the increase in accounts receivable
of $218,133 as a result of our increased sales. For the six-month period ended
June 30, 2013 net cash used in operating activities was $684,241, which
primarily resulted from the net loss of $890,899.
For the six months ending June 30, 2014, $36,504 was used in investing
activities for the purchase of software and capitalized patent costs. For the
six months ending June 30, 2013, $42,832 was used in investing activities for
the purchase of equipment.
Net cash provided by financing activities was $546,141 for the six months ended
June 30, 2014, which was composed of $550,100 in loans from our stockholders as
described above, offset by $3,959 in payments of capital lease obligations. Net
cash provided by financing activities was $661,519 for the six months ended June
30, 2013, which was composed of $665,155 in loans from our stockholders as
described above, offset by $3,636 in payments of capital lease obligations.
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